Covenantor

Labour & European Law ReviewWeekly Issue 38503 September 2014

Although courts are likely to favour a contractual provision such as a restrictive covenant that makes commercial sense (as opposed to an apparent absurdity), the Court of Appeal said in Prophet Plc v Huggett that they can only do so if the language of the provision is truly ambiguous and allows for clear alternatives as to the sense the parties intended.

Basic facts

Mr Huggett joined Prophet, a software company, as the UK sales manager for the fresh produce industry in February 2012.

Clause 19 of his contract contained a restrictive covenant which stated that he could not “be engaged, concerned or interested in any business which is similar to, or competes with, any business of the Company in which the Employee shall have worked whilst employed hereunder.” Clause 20 contained covenants prohibiting Mr Huggett from using or disclosing confidential information; from soliciting or procuring orders; or dealing with or accepting orders from any of Prophet’s customers for the previous 12 months.

In December 2013 Mr Huggett informed his employer that he was resigning in order to work for a competitor, K3. Prophet said he would be in breach of clause 19 if he went to work for K3 and asked for an undertaking that he would refrain from working for them for 12 months after leaving Prophet. If he refused, it would apply for an injunction.

Mr Huggett agreed not to breach clause 19 pending an expedited trial and in the meantime, K3 agreed to keep him on their books. It also agreed not to encourage or allow Mr Huggett to breach the clause 20 covenants. Prophet did not think that gave them sufficient protection and pressed for an injunction.

High Court decision

At the trial for an injunction, Prophet agreed that, on a literal reading of clause 19, Mr Huggett could only be barred from working with competitors on two products that only it provided, thus rendering the covenant pointless.

The judge took the view that something had gone wrong in the drafting of the clause as it did not do what it was supposed to do, which was to protect Prophet. He therefore amended the covenant to refer to products that were “similar” to those produced by Prophet and granted an injunction prohibiting Mr Huggett from providing business computer software for the fresh produce industry until the beginning of January 2015.

Court of Appeal decision

However, the Court of Appeal disagreed. It said that although courts are likely to favour a contractual provision that makes commercial sense (as opposed to an apparent absurdity) they can only do so if the language of the provision is truly ambiguous and allows for clear alternatives as to the sense the parties intended to achieve.

This, however, was not a case in which the Court could accept that something had “gone wrong” with the drafting. On the contrary, the words of the proviso reflected exactly what the draftsman intended - which was to ensure that no wider post-employment restriction was imposed than was reasonably necessary. It was not therefore possible to conclude from reading the proviso that, although it actually achieved result A, it was clear from its language as a whole that the draftsman really intended to achieve B – or, for that matter, C, D or E.

The High Court judge was not, therefore, entitled to re-cast the “parties’ clause 19 bargain” in the way that he did. As the meaning of the proviso was clear, there was no basis for interpreting it differently. It followed therefore that if Mr Huggett went to work for K3, which did not provide either of the two specified products, he would not be in breach of clause 19.

Comment

This case shows that there is no substitute for taking careful instructions, thinking through the underlying concepts before drafting a covenant. While the court may step in when the drafting goes wrong, it will only do so if the covenant is ambiguous in the sense of there being conflicting meanings and one that makes clear commercial sense.